As an agency owner, I’m sure you know how important it is to have your cash flow running smoothly.
I was reading the other day that up to 60% of failed companies say cash flow problems were the reason why they went out of business.
If you don’t want to be a statistic, you need to make sure to establish good payment terms with your clients (and have them pay you on time).
The thing is…
Clients might want to pay you at the end of a project or the end of the month upon service delivery.
This happened to us many times when we worked with large clients at Jakt due to their size.
For example, for our customers that did 100s of million in revenue, they could be a bit slow on payment, or straight up reject paying us upfront.
Now, in those cases, we didn’t mind as much.
The risk of them not paying us was very very small. They were big, so it was more likely that they wouldn’t have any financial issues to afford to pay us.
And at the end of the day, we couldn’t really negotiate with them because we were too small.
That said, you don’t want to accept payment terms that put you at risk and leave the client with all the leverage.
As an agency owner, if you accept payment terms that have the client paying you at the end of the month, it puts all the risk on you.
You run the risk of not getting paid, even if you've done a whole month's worth of work.
Or the risk of the client trying to get more out of you using the payment as leverage.
At Jakt, we asked for a nice deposit on hand from our clients at the start of the project to help cover losses if they didn't pay us.
We treated it like a real estate apt deposit (it did not apply to the first invoice and got held by us).
Other times, we asked for…
• Half up front, half in the middle of the month
• Half in the middle of the month, half at end of the month.
Now, say they won't go for any of those options. Then it becomes a business decision for you.
Think through things like:
• What are the chances they don't pay?
• Will they actually pay at the end of the month or will they pay like net60?
• Are we willing to take on this risk?
• Think through the worst-case scenario and how that would play out for you (it's good to be optimistic but also need to cover your downside risk).
The gravity of the risk depends on the customer.
If you think the risk is low and you want to take it on, then do it.
Or even if you think it's a higher risk but you want to take it on, then do it.
Just know that there's some risk to taking on a deal where payment terms heavily favor the customer.
Attempt different payment terms (such as the ones I suggested or alternatives that you creatively come up with) to try and de-risk your position as much as possible.
There are many agency owners I’ve spoken to who have come up to me with this issue.
Here’s a compilation of things I’ve told them (which I personally found helpful):
• You aren’t a bank
If the client isn't reimbursing you on time, you might need to change how you manage the relationship.
Otherwise, you are getting charged interest which eats out of your profits + not getting compensated every time they pay late.
• Charge interest on any balances after 30 days
Do this to match any interest you will be paying on the balance (or other methods of funding).
• Get a line of credit or any type of invoice financing
The rate on a line of credit is cheaper, but if you can't get one, look into invoice financing.
If the client hasn't paid off in 30 days, you can then use this to pay off the balance on your card.
You'd then owe them money but at a lower interest rate than a CC company.